Tim Hortons Inc. is racing to find a new chief executive officer after the surprise departure of Don Schroeder, sparking uncertainty about the coffee-and-doughnut chain’s international expansion strategy as its domestic business shows signs of weakness.
In a shuffle that raises more questions than it answers, the company named executive chairman Paul House, 67, as temporary CEO. Mr. Schroeder, 64, took the reins in 2008 from Mr. House. But even many Tims franchisees were mystified as to what prompted Mr. Schroeder, a 20-year veteran of Tim Hortons with a strong track record at the company, to leave so hastily.
The company said in a brief statement that the board has been working on succession planning for a while in concert with a strategic review. But the board and Mr. Schroeder failed to agree on the details of a transition plan, prompting Mr. Schroeder to leave.
The abrupt move comes just six months after Mr. Schroeder made a defining decision in the corner office late last year with regard to the chain’s prickly problem of underperforming U.S. stores: He moved to close 54 of about 600 locations, mostly in Connecticut, Rhode Island and Massachusetts, essentially an admission of how far the company can - and cannot - go in the United States.
Still, despite improving sales this year at the remaining U.S. outlets, the company faces headwinds of rising costs for coffee and other key ingredients, prompting it to raise prices recently, and missteps in its popular Roll up the Rim to Win marketing program, which hurt its first-quarter results. For the past two quarters, Tims missed analysts’ earnings projections.
At the same time, two quarters of results that were slightly below expectations are usually not enough to send a CEO packing, and left those who follow the company closely scratching their heads.
“It’s highly unusual,” said Kenric Tyghe, a retail analyst at Raymond James. “It’s not a corporate culture that is known for taking this type of action. It was either a power struggle or a strategy struggle … I have to believe there are some other shoes to drop here.”
Mr. Schroeder and Mr. House, who still had executive duties in his role at Tims, may have had conflicting views of running the company, Mr. Tyghe suggested.
Facing competitive pressures from powerhouses such as McDonald’s Co. and Dunkin’ Donuts, Tims has been mapping out an international strategy to move beyond Canada even as it grapples with challenges on its home base.
Its first-quarter results were soft largely because of the chain’s high profile Roll up the Rim to Win contest: the promotion shaved about one percentage point from its same-store sales growth at stores open at least 13 months, which was a tepid 2 per cent in Canada for the quarter ended April 3. The odds of winning a prize were one in six this year, up from one in nine last year.
The chain’s first-quarter profit of 48 cents was higher than last year’s 45 cents, but missed the average analyst estimate of 51 cents. Heavy snowfall in January also hurt sales, the company said. But it stuck to its earnings guidance for the year and also re-affirmed its forecast of same-store sales growth of 3 to 5 per cent for 2011.
In the same quarter, the company made progress on the U.S. front, where it has struggled in past years. Same-store sales – an important measure of a retailer’s health - rose a stronger 4.9 per cent at its U.S. stores.
Keith Howlett, retail analyst at Desjardins Securities, said Mr. Schroeder was underpaid compared with his CEO peer group in the North American restaurant industry. “This was especially the case given the company's track record of continuous success.”
The company raised Mr. Schroeder’s basic salary to $750,000 in 2011 from $650,000 last year; his targeted compensation would have been $3.75-million this year, up from the $3.59-million he got in 2010.
Last year was the final one of a transition of roles and responsibilities between Mr. House and Mr. Schroeder, according to a company filing. It said Mr. Schroeder's compensation increase in 2011 brought it to the median of his peer group.
Mr. Howlett said Canada is the only market worldwide where fast-food rival McDonald's has lost its leading market spot to a rival - Tims. The company’s sales are more than 60 per cent higher in Canada than those of McDonald's, he said.
Other observers weren’t worried about the company being hurt much by Mr. Schroeder’s departure. Peter Sklar, retail analyst at BMO Nesbitt Burns Inc., said Mr. Schroeder wasn’t critical to the company’s development, noting that Mr. House already carried out some of the CEO responsibilities as executive chairman.